FLUSH WITH CASH--COLOMBIA'S RISING INFLOW OF

UNCLAS BOGOTA 007110

SIPDIS

SENSITIVE
SIPDIS

WHA/EPSC FOR PMAIER; EEB/OMA FOR ASIROTIC

E.O. 12958: N/A
TAGS: ECON EFIN ETRD SNAR KCRM CO
SUBJECT: FLUSH WITH CASH--COLOMBIA'S RISING INFLOW OF
DOLLARS

REF: BOGOTA 6103


1. (U) SUMMARY: Colombia's international reserves have topped
USD 20 billion for the first time ever. Rising exports,
foreign direct investment, and remittances, as well as
increased international borrowing, have infused Colombia's
financial system with dollars and solidified its debt-service
capacity. Although a portion derives from illicit activities
such as narcotics trafficking, the majority of the inflows
reflect Colombia's booming economy and increased investor
confidence. Negatively, the surplus of U.S. dollars in the
economy has hastened the 10 percent appreciation of
Colombia's currency this year and tilted the country's trade
balance into a deficit for 2007. END SUMMARY.

The Good--Exports, Investment, and Debt Coverage Up
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2. (U) The largest source of Colombia's dollar inflows has
been exports, which totaled USD 12.9 billion in the first
half of 2007 or 14 percent higher than the same period in

2006. Colombia's continued export growth coincides with a
steady increase in investment and remittances. Foreign
direct investment (FDI) for the first half of 2007 totaled
USD 4.1 billion--a 43 percent increase compared to 2006--with
the largest flows directed into the energy, industrial and
commercial sectors. During the same period remittances from
Colombian expatriates totaled USD 2 billion or six percent
more than 2006. As a result, Colombia's international
reserves are now more than two and half times its short-term
external debt obligations, increasing Colombia's buffer
against market shocks and lowering the risk premium the GOC
must pay for financing.

The Bad--Imports, External Borrowing, and the Peso Up Too
-------------- --------------


3. (U) Conversely, imports, fueled by the strong Colombian
Peso, grew 26 percent to USD 14 billion for the first half of
2007 and are expected to shift Colombia's trade balance into
deficit for the year. External debt financing also increased
significantly (115 percent),totaling USD 6.7 billion.
According to the Central Bank, private businesses in Colombia
received almost USD 2.8 billion in external financing in the
first half of the year while the GOC received USD 3.9
billion. Critics of GOC monetary policy attribute much of
the appreciation of the Colombian Peso to the government's
borrowing habits. However, with rising tax collections
(reftel),the GOC aims to lower its fiscal deficit in 2008.
In an unsuccessful effort to slow the appreciation of the
Colombian Peso, the Central Bank has purchased USD 4.7
billion in dollars this year, further swelling Colombia's
international reserves.

The Ugly--Drug Proceeds Continue to Flow In
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4. (U) Local analysts acknowledge that a portion of the
dollars entering Colombia derive from illicit activities,
principally profits from narcotics trafficking, but emphasize
the difficulty in accurately measuring such inflows.
Colombia's National Directorate for Taxes and Customs (DIAN)
estimates that at least USD 946 million in illicit funds
entered Colombia between January and September in comparison
to USD 1.8 billion during the same period in 2006. Given the
difficulty in measuring illicit inflows, however, local
analysts cannot confirm such a decrease but have suggested
that large seizures of drug money in June and July may have
persuaded traffickers to temporarily seek different havens
for their profits.
Brownfield